Andrew Scott v The Commissioners for HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 May 2017 |
| Neutral Citation | [2017] UKFTT 385 (TC) |
| Date | 04 May 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Ashley Greenbank
Mr Michael Firth appeared for the appellant
Mr Simon Pritchard, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Capital gains tax – Effect of claim for corresponding deficiency relief under Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”), s. 539 on rates of tax on chargeable gains in tax years 2006–07 and 2007–08 – Construction of Taxation of Chargeable Gains Act 1992 (“TCGA 1992”), s. 4 and s. 6(2).
Jurisidction – Whether the First-tier Tribunal (FTT) has jurisdiction to consider argument that amendments made in closure notice invalid because HMRC had no power to enquire into its own calculation under Taxes Management Act 1970 (“TMA 1970”), s. 9A – Construction of TMA 1970, s. 50(6).
Procedure – Enquiry under TMA 1970, s. 9A – Whether HMRC able to enquire into their own calculation.
The FTT decided that for the purposes of computing the unused part of an individual's basic rate band in TCGA 1992, s. 4(4), the amount referred to in TCGA 1992, s. 6(2) can be an amount up to the full amount of the corresponding deficiency relief, but that the reduction required by s. 6(2) cannot reduce the total income (2006–07) or the Step 3 income (2007–08) to a negative figure: The FTT also decided that it does have jurisdiction to determine whether HMRC were entitled to enquire under TMA 1970, s. 9A into the calculations of tax due in Mr Scott's tax returns for the tax years in question and that HMRC were entitled under TMA 1970, s. 9A to enquire into the calculations of tax due in Mr Scott's tax returns for the tax years in question and so the amendments made by the closure notices were valid.
Mr Scott (the appellant) was appealing against HMRC's decision that the rate of capital gains tax (CGT) applicable to gains accruing to him in the tax years 2006–07 and 2007–08 was 40% rather than, as Mr Scott contended, 20%.
The substantive issue concerned corresponding deficiency relief (CDR), ITTOIA 2005, s. 539, and its impact on the rate of CGT payable. HMRC had opened enquiries into Mr Scott's self-assessment returns for the tax years 2006–07 and 2007–08. HMRC closed their enquiries into both tax years on 13 February 2015. The closure notice in respect of the 2006–07 tax year showed that Mr Scott had income of £44.16m and chargeable gains of £8.84m. The closure notice in respect of the 2007–08 tax year showed income of £7.98m and chargeable gains of £14.71m. The amount of CDR exceeded Mr Scott's income and gains for both tax years. The closure notices challenged, inter alia, the impact that deductions claimed in respect of insurance policies had on the rate of CGT and charged tax at the 40% rate (rather than the 20% rate).
The enactment of the Income Tax Act 2007 (ITA 2007) meant that amendments were made in the 2007–08 tax year to all three statutory provisions being considered under the substantive issue (ITTOIA 2005, s. 539 and TCGA 1992, ss. 4 and 6(2)). Despite this, the parties were in agreement that the effect of the legislation was the same for both tax years. However, as there was a further argument that only arose for 2007–08, the judge considered each tax year separately and referred to the legislation in force in each respective tax year.
Mr Scott argued that the effect of the legislation was to extend the basic rate band by the amount of CDR that is available for the purposes of calculating the rate of CGT. This was referred to by the judge as the “appellant's interpretation” and was based upon what was expressed as a purposive interpretation of the provisions. This method of calculation was the basis upon which the third-party software used by Mr Scott's accountants to calculate the CGT payable had calculated the rate of CGT as 20%.
HMRC had advanced two arguments on how the rate of CGT should be calculated referred to by the judge as the “negative income argument” and the “amount argument”. The negative income argument was that the CDR deduction can only reduce income to nil for the purposes of TCGA 1992, s. 4(4) with the effect that the unused part of the basic rate band in TCGA 1992, s. 4(4) cannot be more than the whole of the basic rate band. The amount argument was that the deduction is limited to an amount required to reduce an individual's income to the basic rate threshold and therefore CDR does not affect the rate at which CGT is charged on capital gains.
For 2006–07, the judge considered all three arguments and decided that the correct interpretation of the law was based on HMRC's negative income argument.
For 2007–08, HMRC advanced a further argument (referred to by the judge as the “gateway argument”) that was relevant to that tax year only as Mr Scott had material income which, in the absence of a claim to CDR, would have been taxable at a higher rate. TCGA 1992, s. 4(2) provides that if income tax is chargeable at higher rates, all capital gains accruing are taxed at the higher rate. HMRC contended that determining whether income is chargeable at higher rates occurs before the application of CDR. The judge rejected this argument. For 2007–08, the judge also decided that the correct interpretation of the law was based on HMRC's negative income argument.
There was also a procedural issue concerning whether HMRC were able to enquire into tax calculations that had been performed using third party software based on specifications and algorithms provided by HMRC to the software provider.
Mr Scott had previously sought a judicial review against HMRC to establish that when HMRC had indicated that the relevant rate of tax was 20% he had some legitimate expectation that that was the proper rate so that HMRC could not subsequently apply a higher rate. The written and oral applications for judicial review were rejected because there had been no unequivocal representation that the tax rate would be 20%. When the applications for judicial review failed, the appellant then applied to the Tribunal to amend its substantive case to add that since the tax shown on the original returns had either been calculated by HMRC at 20% or inserted on the electronic return in reliance on indications from HMRC, HMRC could not properly, in pursuing “enquiries”, enquire into their own calculations and recommendations. This application was allowed (see Scott TAX[2016] TC 04947).
Before considering the procedural issue, the judge dealt with an issue raised by HMRC concerning whether the Tribunal had the jurisdiction to determine if HMRC were entitled to enquire under TMA 1970, s. 9A into the calculations of tax contained in Mr Scott's tax returns for the tax years in question. The judge distinguished the issues from the FTT decision in Rotberg TAX[2014] TC 03780 and considered that the FTT did have the jurisdiction and that there was nothing in TMA 1970, s. 50(6) that should constrain the FTT from determining the issue.
On the procedural point, the judge rejected Mr Scott's arguments and concluded that the amendments made by the closure notices were valid.
In considering the procedural issue, this decision highlights that calculations of tax due produced by software cannot necessarily be relied upon and that HMRC do have the power to enquire into these calculations (even if HMRC provided the specifications) as the calculations form part of the self-assessment. The timing of the release of this decision is pertinent given the recent reports in the national press (as highlighted by the Chartered Institute of Taxation) of errors in HMRC's 2016–17 tax calculator software and third party software packages.
Paragraph 147 of the decision provides details concerning other taxpayers affected by this issue. It states that in 2007–08, 13 cases were identified as having an incorrect result as a consequence of the interaction of the CDR and CGT rules. Mr Scott's case was one of the 13 cases. The tax at stake for Mr Scott was £3.1m, whereas for the other 12 cases, it was £23,000 in total. However, the decision is silent on the impact for other tax years.
[1] This decision relates to an appeal by the Appellant, Mr Andrew Scott, against two decisions of the Respondents, HMRC, contained in two closure notices, both dated 13 February 2015, one for the tax year 2006/07 and the other for the tax year 2007/08.
[2] Mr Scott appeals against HMRC's decision that the rate of capital gains tax (“CGT”) applicable to gains accruing to Mr Scott in each of those tax years was 40% rather than, as Mr Scott contends, 20%.
[3] There are two issues before the Tribunal.
[4] The first issue concerns the interaction of provisions relating to availability of relief under section 539 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), known as “corresponding deficiency relief” (“CDR”), and those relating to CGT. The detail of this argument is set out below, but, in summary. Mr Scott says that his claim for CDR affects the rate at which CGT is payable on his capital gains in the relevant tax years so that he is only liable to pay tax at the lower rate and not the higher rate. The parties referred to this first issue as “the substantive issue”. I have used that term in this decision.
[5] The second issue turns on the manner in which tax has been calculated and assessed in this case. Mr Scott's returns for the relevant tax years were submitted incorporating calculations of the tax due made using software based on HMRC's specifications. Those calculations showed tax payable on capital gains at the lower rate. Following enquiries under section 9A of the Taxes Management Act 1970 (“TMA”), HMRC issued closure notices charging tax on those gains at the higher rate. Mr Scott says HMRC was responsible for the way in which his tax liability was calculated in the relevant years and it was not open to HMRC to “enquire” into a calculation which HMRC had itself performed...
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Andrew Scott v The Commissioners for HM Revenue and Customs
...of approximately £9.42 million for the two years. [4] Mr Scott's appeals to the First-tier Tribunal (“the FTT”, Judge Ashley Greenbank, [2017] TC 05851) and thence to the Upper Tribunal (“the UT”, Nugee J and Judge Nicholas Aleksander, [2018] BTC 520), were dismissed. Mr Scott now appeals t......